Assessing the contribution of shadow banking to systemic risk in South Africa during COVID-19

Abstract

Background: Systemic risk studies in the coronavirus disease 2019 (COVID-19) period focus mostly on the banking sector. Regulators however, yearn for data on the contribution of shadow banking to systemic risk during the pandemic.

Aim: The primary goal of the study is to determine the contribution of shadow banking to systemic risk during the COVID-19 period in South Africa.

Setting: The study focussed on shadow banking, non-bank financial institutions involved in credit intermediation outside the traditional banking system in South Africa.

Method: Systemic risk is measured by conditional value-at-risk methodology using monthly market returns of fixed-income funds, funds-of-funds, money market funds and multi-asset funds from January 2015 to December 2021.

Results: Shadow banking contributed to systemic risk during COVID-19, and systemic risk reached an all-time high during the onset of the pandemic. Money market funds exhibited higher systemic risk because of the COVID-19 shock. However, multi-asset funds and funds-of-funds are the classes that contributed more to systemic risk during the COVID-19 period. Furthermore, systemic risk trends of multi-asset funds and funds-of-funds increased with the rise in COVID-19 infections, except in the third wave when systemic risk peaked months after the surge in COVID-19 cases.

Conclusion: Shadow banking contributes to systemic risk in South Africa and systemic risk peaked during the COVID-19 period.

Contribution: There is growing evidence on systemic risk during COVID-19, and this study extends the focus to shadow banking. It draws attention of regulators to credit intermediation outside traditional banks.